Yesterday, Institutional Shareholder Services Inc. (ISS) announced proposed voting policies for 2020 affecting proposals related to three areas: (1) multi-class structures for newly public companies; (2) independent board chair; and (3) share buybacks. ISS states that the proposed changes either clarify an existing policy or largely codify an existing practice.
ISS requests feedback on the proposed rules, and market participants can submit comments until 5:00 PM ET on Friday, October 18, 2019. ISS expects to release its final policies in the first half of November 2019.
Over the summer, ISS administered its annual benchmarking survey to market participants, and two of the three topics covered by the proposed rules (multi-class structures and independent chair) were included in the survey. ISS is using the results of the survey, which we previously covered, to help inform its rulemaking decisions. Notably, survey questions relating to board diversity, director overboarding, economic value added (EVA) and climate change risk did not result in ISS proposing a new or updated policy.
ISS’s current policy states that ISS will generally oppose the re-election of incumbent directors, committee members or the entire board of newly public companies that have bylaw or charter provisions that are adverse to shareholders rights, including provisions that entrench the board. On a case-by-case basis, ISS will recommend voting against or withholding from directors, committee members or the entire board until the adverse provision is reversed or removed.
ISS’s proposed policy expressly includes multi-class structures for newly public companies where the classes have unequal voting rights. For these structures, ISS will consider reasonable sunset provisions as a mitigating factor; however, sunset provisions that exceed seven years will not be considered reasonable. ISS adds that research shows the benefits to the structure dissipate with time, and 55% of respondents of the 2019 benchmarking survey who answered the question relating to multi-class structures agreed that a maximum seven-year sunset is appropriate. Nonetheless, ISS notes that investor sentiment is split on the use of multi-class structures in general.
ISS proposes to evaluate the reasonableness of any time-based sunset provision based on:
(a) the company’s lifespan;
(b) the post-IPO ownership structures; and
(c) the rationale for the sunset.
The proposed policy states that ISS will continue to oppose incumbent directors until the multi-class structure is reversed or removed.
Although the topic of share buybacks was not included in the 2019 benchmarking survey, ISS is asking for feedback modifying this policy. Except for certain financial institutions, most U.S. companies can conduct a share buyback without shareholder votes. In addition, some U.S.-listed cross-market companies that are subject to non-U.S. regulations are required to hold a shareholder vote. Currently, ISS will support management proposals to institute a buyback when all shareholders may participate on equal terms. The updated policy proposes that ISS will support proposals that give the board authority to conduct buybacks in the absence of certain adverse conditions or impact such as threatening the company’s long-term viability.
In addition, ISS will make voting recommendations on a case-by-case basis for proposals that seek to permit the company to repurchase shares directly from specified holders. ISS asks market participants to disclose which factors they use in determining whether to support a buyback proposal and provides the following examples:
(a) magnitude of the buyback as a percentage of outstanding shares;
(b) duration of the authority; and
(c) maximum purchase price.
Independent Board Chair
The current policy states that ISS generally recommends voting for shareholder proposals that require an independent chair, based on ISS’s consideration of numerous factors. The proposed policy expressly delineates the factors that will increase the likelihood of a favorable ISS recommendation:
(a) a weak or poorly defined lead independent director;
(b) the presence of an executive or non-independent chair in addition to the CEO, a recent recombination the CEO and chair roles, and/or departure from an independent chair structure;
(c) the board’s failure to oversee and address of material risks;
(d) a material governance failure; or
(e) the board’s failure to intervene when management’s interests are contrary to shareholders’ interests.
ISS asks market participants to identify what other factors they take into consideration when determining whether to support shareholder proposals seeking an independent chair.
ISS plans to update and include an overview on how ISS analyzes the scope and rationale of an independent chair proposal in ISS’s Policy FAQ document.
ISS invites questions to be submitted via email to email@example.com.